This last chapter revisits briefly some of the key issues
examined in previous chapters. It examines their practical implications and
consequences for water policy and management in agriculture. The key issues are
highlighted in the context of the new integrated catchmentwide approach to water
policy and management in place in North America and evolving in Europe. Although
the socio-cultural, institutional and economic setting of water policy and
management is very different in developing countries, the essentials of the more
integrated management approach will eventually also need to be incorporated in
their water policy and management as water (and especially water of good
quality) becomes scarcer and its value increases. The core concern is that
demand for water is increasing both in agriculture and in other areas, such as
the municipal sector. Scarcity of future freshwater generation capacity and
escalating costs of exploitation are formidable challenges. The problem is
exacerbated by worries over the environmental impact of agricultural water use,
in particular water quality degradation effects. Thus, the fundamental policy
and management question is quite simple: how can the available water resources
be managed more sustainably to enhance the efficiency of food production and to
safeguard environmental systems and their provision of goods and
services?

Values and services

The values of the extractive and in-situ services
provided by water resources in their naturally occurring settings have proved
difficult to capture. The thrust of economic valuation of "water" has
concentrated on the 'pricing' and 'efficiency' of water supply services with a
view to full cost recovery for the service provided. Such analyses rarely
consider the extractive and in-situ values of the resource base itself
and the complications contingent upon its common pool/property character, e.g.
lack of clear boundaries linking the physical flow domain and
socio-economic/public domain.

However, the competition for raw water is intensifying and
agriculture is often cited as the principal 'user' of raw water. The fact that
agricultural use involves returns of significant (although often degraded)
volumes of water is sometimes ignored. Nevertheless, national agriculture
policies in developing countries continue to promote irrigated agriculture to
minimize perceived risks in food supply and distribution. In addition, the
promotion of agricultural activity is considered strategic in fixing and
developing rural economies. In many cases the existing systems of water use
rights have reinforced the seniority of agriculture user rights. Nevertheless,
relative to water use in industry and municipal sectors, agricultural water
supplies are very sensitive to supply shocks (Rosegrant et al.
2000).

These circumstances are being questioned continually as
intersectoral competition for raw water between agriculture, domestic, municipal
and industrial uses intensifies at national level and at international level
where economic asymmetry between riparian countries drives competition over
shared water resources. In addition, public interest in the maintenance of
in-situ environmental services (for amenity, recreation, biodiversity,
conservation and ecology) is pressuring the large sectoral users of water into
accommodations and trade-offs. Therefore, the agriculture sector needs a
transparent system of resource evaluation with which to negotiate and regulate
allocation of the resource, both at the national level and at the international
level in the case of shared river basins, aquifers and catchments.

Integrated approaches to water policy and water management has
recently been institutionalized in Europe through the adopted Water Framework
Directive (2000/60/EC). The Water Framework Directive is one of the first
European Directives to recognize explicitly the role of economics in reaching
environmental and ecological objectives. The Water Framework Directive calls for
the application of economic principles (e.g. polluter pays), economic methods
(e.g. cost-effectiveness analysis) and economic instruments (e.g. water pricing
methods) for achieving good water status for all waters in the most effective
manner. Furthermore, the Water Framework Directive has specific characteristics
that have their roots in a systems approach to environmental management in
general. It is the striking of a balance between the complementarity and the
trade-off that exists between economic growth and water resource degradation and
depletion that defines the context underlying the question of how to decide on
economic and environmental policies and investments for water
resources.

Thus, it is possible to summarize the sustainable water
resource use problem as comprising the following features (Turner and Dubourg,
1993):

Water is generally
non-substitutable (although at the limit there is an almost infinite supply of
seawater, which can be converted into freshwater at a cost of energy and some
pollution).

Water faces rising overall
demand and use intensification.

Water has limits to use. There
are physical limits, e.g. the rate of groundwater recharge. However, at the
aggregate level, the notion of an absolute physical limit is less valid because
adjustment mechanisms (recycling, etc.) should mean that water will be available
for the foreseeable future at reasonably practicable prices. There are relative
cost limits in the sense that, as usage of existing supplies intensifies and new
supplies are sought, the cost of extraction and usage will escalate. Finally,
there are social limits set by the social acceptability of the effects of
certain uses, e.g. water quality and flow conditions for recreational
activities.

Notions of efficiency

In the face of the growing scarcity of water resources and the
need for better management, much of the discussion has focused on increasing
current water use efficiency and the promotion of efficient allocation of water
resources among different users.

Traditionally, economic efficiency of irrigation water use has
been measured in terms of crop output per unit of water applied or the overall
financial returns in terms of net benefits from the project. This concept has
been used widely in investment decision-making, where the desire is to maximize
returns from irrigation over the life of a project. However, there is a need to
recognize fully that the aim of water resource management is not simply to
provide water of sufficient quality and quantity. Water resources have
additional value, e.g. in terms of their recreational and ecological services.
As such, the concept of economic efficiency can be defined more generally in
terms of the Pareto optimality condition, where it is not only private costs and
benefits that are considered, but also the non-financial social costs and
benefits. Economic efficiency also refers to the maximization of the overall
socio-economic net benefits from the different water sectors, with the aim of
minimizing the intersectoral and intrasectoral socio-economic opportunity
costs.

In addition, considering economic efficiency from a
sustainability point of view as 'critical natural capital' implies that water
must be managed in such a way as not to reduce the opportunities for potential
use by future generations. In this respect, water withdrawal and use for
irrigation purposes can have negative impacts on wetlands, aquatic ecosystems
and corresponding ecological functions, which the usual view of water use
efficiency does not take into consideration. Negative impacts also include
external costs, such as those from waterlogging, salinization and soil erosion,
which are also not usually incorporated into the economic price of irrigation
water. There may also be ecological limits to water use such that even though
water is being used more efficiently, the total amount being withdrawn still
exceeds the sustainable supply.

Valuations and pricing

Because water resources and effects are often non-marketed, it
is extremely important to ensure that the 'true' economic value of such
resources are accounted for where possible when making decisions on capital
investment and linked water and environmental policy. As such, there is a
fundamental connection between the issue of economic valuation of water
resources and the pricing of water resources. Efficient allocation and
sustainable use of water require the setting of the "correct" price for water,
namely that corresponding to its marginal economic value. Nevertheless, how to
arrive at this "correct" price remains open to debate.

Many countries and water management agencies are turning
increasingly to water pricing mechanisms in order to regulate irrigation water
consumption. 'Pricing' can mean that actual prices are introduced (amended),
where goods were previously free (underpriced). It can also mean that actual
prices are not introduced (amended), but that the marginal economic value of the
resource is entered into an appraisal and accounting procedure, such as
cost-benefit analysis. Both forms of 'pricing' result in the internalization of
environmental damage costs. Unless water resources are priced correctly, and
those prices are internalized in actual decisions, there will be distortions in
the economy. These distortions can have the effect of biasing investment and
policy decisions against water resource degradation concerns, such that there is
a misallocation of resources and social welfare is not maximized. Methods of
water pricing and their performance will be dependent on the physical, social,
institutional and political context. Several water pricing methods have
developed in practice, depending on the nature of the economic and natural
conditions in existence. In particular, these include, volumetric pricing,
non-volumetric pricing and market-based methods. It has long been recognized
that markets are a mechanism to allocate water according to its real value, thus
leading to efficiency gains. While markets are considered to be more flexible
than administrative means for allocating water, their use has often been
questioned, especially because there are certain characteristics associated with
water production and delivery that give rise to market failure. Such failures
include externalities, recharge constraint, imprecise information, large fixed
investment costs, and declining average costs of delivery.

This report has extended its focus to a wider concept of
efficiency and water resource management than that considered by the traditional
water pricing literature. It has incorporated environmental, ecological and
other social spheres of concern, which need to be reflected in any pricing
system. This is especially important where water allocation is being considered
within a region or river catchment, or irrigation projects are to be considered
at this appropriate scale. Focusing on the local-level scale is not sufficient
to ensure efficiency gains in terms of a wider efficiency concept. The report
has also taken a wider perspective in terms of the scope/scale of water resource
allocation being considered, with the catchment as its minimum basis. A more
integrated approach to water management is required to deal with the policy
challenges at this broader scale.

An integrated framework to water
resource valuation, appraisal and management

Given the generic goal of sustainable water resource
management, this report has taken an approach based on an integrated framework
in which water is an integral component of a catchmentwide ecosystem, a natural
resource, and a social and economic good, whose quantity and quality determines
the nature of its use. At this scale, coupled hydrological economic models and
information must underpin water management (Rosegrant et al. 2000). While
still rudimentary, this form of analysis is evolving quickly.

At the heart of this approach are a number of generic
principles that together form a powerful and comprehensive case for the wider
adoption of a decision-support system based around economic analysis:

the principle of
cost-benefit analysis;

the principle of functional
diversity maintenance;

the principle of integrated
planning and management at the catchment level;

the principle of long-term
planning and precaution;

the principle of stakeholder
inclusion in decision-making;

Such a management strategy requires efforts to combine three
related dimensions:

systems ecology -
thereby enabling improved understanding of how each component of the water
system (across a catchment scale) influences other components;

hydrological, biogeochemical
and physical - so as to focus on how water interacts with other natural
systems;

socio-economic, socio-cultural
and political - so as to recognize and plan for the accommodation of links to
relevant policy networks and economic and social systems with attendant culture
and history, so maximizing chances of achieving a cooperative
solution/mitigation strategy.

The evaluation framework and decision-support system proposed
in this document are in line with the sustainable water resource management
approach advocated by the World Bank (1993), which has at its core the adoption
of a comprehensive policy framework and the treatment of water as an economic
good, combined with decentralized management and delivery structures, greater
reliance on pricing, environmental protection and fuller participation by
stakeholders. It is recognized that the adoption of such a comprehensive
framework facilitates the consideration of relationships between the ecosystem
and socio-economic activities in river basins. Such a management approach
requires analysis to: take into account social, environmental and economic
objectives; evaluate the status of water resources within each basin; assess the
level and composition of projected demand; and take into consideration the views
of all stakeholders.

In order to deliver the sustainable utilization and management
of water resources, it is necessary to underpin management actions by a
scientifically credible and pragmatic environmental decision-support system,
which, while having the objective of economic efficiency at its heart,
nevertheless recognizes other dimensions of water resource value and
decision-making criteria. The decision-support system incorporates a toolbox of
evaluation methods and techniques, complemented by a set of environmental change
indicators and an enabling analytical framework, thus allowing managers to
identify operational decision steps. Individual projects or schemes can be
appraised in their own right and clearly cost-ineffective options can be
discarded. However, individual schemes and more extensive programmes must be
further placed in a wider analytical context encompassing spatial scales up to
the level of the catchment and temporal scales beyond the short run. Only in
this way is it possible to gain a full appreciation of their effect on overall
economic allocative efficiency and parallel sustainability objectives.

In summary, the 'proper' appraisal of water-related projects,
programmes or courses of action require a comprehensive assessment of water
resources and supporting ecosystems. The DPSIR auditing framework is recommended
as the basis for any such assessment in its full or 'reduced' form. This
framework provides a conceptual connection between ecosystem change and the
driving forces of such change, together with the effects of change (impacts and
their distribution) on human welfare. Policy-response feedback effects can also
be incorporated into the framework. The formulation of such a framework is a
useful scoping procedure even where data sets are deficient.

A combination of quantitative and qualitative research methods
has been advocated in order to generate a blend of different types of policy
relevant information. This applies to both the biophysical assessment of
management options and the evaluation of the welfare gains and losses people
perceive to be associated with the environmental changes and management
responses. The main generic approaches that can form the methodological basis
for appraising strategic options are:

stakeholder
analysis;

cost-effectiveness
analysis;

extended cost-benefit analysis
and risk-benefit analysis;

social discourse
analysis;

multicriteria
analysis.

It is recognized that the complete adoption of such a
procedure requires an institutional, financial and scientific capacity that may
not be feasible in all countries. Therefore, the aim should be to move
iteratively from a 'reduced form' procedure towards a comprehensive assessment
over time. However, certain elements are fundamental: the adoption, as a
minimum, of the catchment scale for analysis; the recognition of the importance
of the functional approach to water uses and resources; the need for a scoping
exercise (DPSIR) that encompasses distributional impacts; and the acceptance of
economic principles for water valuation albeit constrained by cultural,
political and other factors.

The implications for sustainability of
productivity

The more sustainable future water allocation and management
approach advocated here will probably be implemented incrementally over time.
For some, this will be too little, too slowly (Postel, 2003). This polar
ecocentric position would hold that the human water economy is a subset of
natures water economy and intimately dependent on it. From this
perspective, water allocation priorities need reversing so that basic human
needs and ecosystem health requirements are met first and only then should water
flow to uses such as irrigation, hydropower, etc. There is a growing consensus
that the technocentric view of water systems as resources to be exploited fully
for human development needs modification and urgent reform in some developing
countries. However, the sustainable way forward is not clear-cut. The
safeguarding of the life-support and other services provided by water resources
needs a scientific knowledge base. However, this knowledge base is currently
deficient when it comes to quantifying what ecosystem resilience and integrity
needs really are. The use of water for purposes such as irrigation is just as
much a component as is the provision of safe drinking-water supplies in any
rural poverty alleviation strategy.

However, water productivity will have to be enhanced
significantly in the coming decades via efficiency gains enabled through
economic measures such as valuation, pricing and trading, as well as through
technological innovation and the application of appropriately 'scaled' technical
fixes. Community-based watershed restoration and rainwater harvesting projects,
low-cost drip irrigation for smallholders and rural credit provision, for
example, will be just as much part of the sustainability strategy as will
large-scale water resource augmentation projects. In all this striving for
sustainable production based on water, the valuation of the resource needs to be
the first step in laying out policy and management options.